Ford slashes debt, outpaces GM

FORD in the US has taken a major step towards becoming viable after retiring $US9.9 billion ($A14 billion) of debt and slashing its annual interest bill by $US500 million ($A705 million).

The company, which has not requested any loans from the US government, persuaded debtors to accept less than 50 cents in the dollar for their outstanding debts, something General Motors is trying to do with its bondholders.

Ford bought back the $US9.9 billion ($A13.9 billion) of debt for a total of $US2.44 billion ($A3.38 billion) in cash plus 468 million new shares. It still has $US15.9 billion ($A22.4 billion) of debt on its books.

Ford was able to pay cash because new president and chief executive Alan Mulally raised $US23 billion ($A32.4 billion) of new debt when he started in the job late in 2006, before the global financial crisis hit.

While the company is now restructuring some of that debt, the fact that it had cash on hand or lines of credit available meant it has been able to weather the financial crisis better than its Detroit rivals.

Since the financial crisis hit, not only has the cost of loans (interest rates) gone up, even for sound companies, but many companies cannot obtain loans no matter what the interest rate. The US government has had to step in as a lender of last resort for GM, Chrysler and some parts companies in the US automotive supply chain.

The loans raised in 2006 have been used to start converting many of the company’s US plants to make European models and European engines under Mr Mulally’s corporate revival plan.

Investors welcomed Ford’s success in reducing its annual interest bill, pushing up Ford’s shares by 52 cents to $US3.77 on the New York Stock Exchange on Wall Street.

That valued the new shares issued to debtors at $US1.76 billion and meant the consideration for the $9.9 billion of debt was a total of $4.2 billion. That means debtors accepted, on average, about 42 cents in the dollar.

“By substantially reducing our debt, Ford is taking another step toward creating an exciting, viable enterprise,” said Mr Mulally.

“As with our recent agreements with the United Auto Workers Union, Ford continues to lead the industry in taking the decisive actions necessary to weather the current downturn and deliver long-term, profitable growth.”

The news was greeted with cautious optimism by share market and financial analysts.

“Although Ford’s future still depends on a recovery in auto sales, the debt restructuring and union contract changes have decreased the chances of a Ford bankruptcy,” Shelly Lombard, a bond analyst at Gimme Credit told Automotive News.

GM chief executive Fritz Henderson.

GM has a much harder task ahead of it with its bondholders as it wants them to accept $US9 billion in cash, shares and new debt in exchange for $US27 billion of outstanding GM debt.

The cash component represents just eight cents in the dollar, and there would be so many shares issued that the debtors would end up with 90 per cent of GM’s shares and control of the crippled giant.

Of course, the shares and the new debt will be worthless if GM goes into bankruptcy, which new chief executive Fritz Henderson sees as a viable option if the bondholders do not agree to the terms offered.

The significant difference between the Ford and GM offers is that the Ford offer was voluntary, the company offering a total of $1.3 billion in cash to buy back up to all of the $8.9 billion of unsecured notes on issue.

However, only $3.4 billion of the notes were offered, absorbing only $1.1 billion of the $1.3 billion available.

That means that holders of $5.5 billion of notes believe Ford will survive and will be able to redeem the notes at a later date.

GM and Chrysler are teetering on bankruptcy because cash flows have dried up as a result of a 40 per cent slump in new vehicle sales in the first quarter of 2009.

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